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Video: What happens next for stock market dividends?

Emma Wall and Nick Hyett discuss what has to happen next before companies that have cut their dividend reinstate their income pay-out.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please
seek advice. If you choose to invest the value of your investment will rise and fall, so you could get
back less than you put in.

Nicholas Hyett & Emma Wall

27 April 2020

The end of major lockdowns in the UK and internationally will bring some certainty

Companies who are still taking government support are unlikely to pay dividends

Emma Wall and Nick Hyett face the camera as they use their webcams to videocall from home.

Emma Wall: Hi, I am Emma Wall and joining me today to talk about what next for dividends is Nick Hyett. Hi Nick.

Nick Hyett: Good afternoon.

Emma Wall: So we talked earlier about where we are for income investors and the dividend table, and I thought now we’d talk about what next. Give some people some light at the end of the tunnel. What should income investors be looking for to indicate when they might expect the dividends that have been cut, and are being cut, to return?

Nick Hyett: At the risk of stating the obvious, I think the main trigger that we’re going to see for dividends making a return in the UK is the end of major lockdowns, both in the UK and internationally. At the moment, we’ve got a lot of uncertainty about what the long-term damage is going to be from the lockdowns in developed markets. What that means in terms of sales and, ultimately, what it means in terms of profits. Once we’ve got a clear understanding of that, that’s when companies are able to say ‘we were over-cautious and, actually, we have spare cash we can return to shareholders’. That’s the ideal outcome.

We want them to have been over-cautious, we want spare cash sitting there at the end of this. But, not only are we talking about the uncertainty about what the impact on profits is, we’re also talking about the point at which companies will no longer be requiring government support. Whether that’s through furlough schemes or through direct financial support in some industries. I think, at the moment, at a point when you’re taking government support, whether that’s to pay employees’ wages or whether that’s through direct loans, it’s just particularly a really poor decision to be paying out cash to shareholders.

Even companies which might theoretically be able to do that are just not going to do it, it’s just not politically astute in the current market. So once that process is through, actually, those companies might then be in a position to start repaying cash out of dividends. The only other thing to bear in mind is that a lot of companies will come out of this with a lot of debt. Companies that have had to borrow to keep paying rent, to keep paying wage bills, when sales have been very low. Actually, they’re going to want to reduce the amount of debt on their balance sheets and actually I think probably companies will become more cautious after this.

They’re going to want to have less debt, going forward, than they did perhaps before, because although the lockdowns might be over, there’s no guarantee we might not see something similar again in a second spike outbreak of the virus or, indeed, the dangers of pandemics more generally are definitely much more well-understood now than they were before the current crisis.

Emma Wall: And are there any particular sectors where, because of the cyclical nature or the sensitivity to the economic restrictions that we’re currently under, will also be the first to bounce back once those restrictions are lifted? Are there certain sectors where you think, yes, they’ve taken the medicine now, but may be among the first to recover and return to paying a dividend?

Nick Hyett: I think you’ve got certain sectors like, some of the more agile retailers, perhaps some of the, again, more agile leisure groups. These are companies which have been able to dramatically reduce costs very quickly, and potentially could flick on revenue again very quickly. Having said that, I think that depends largely on what the economic environment is like, coming out of this. Consumers – we get the much talked about V-shaped recovery where the economy bounces back very, very quickly. Those are businesses that will be able to flick the switch and be selling again tomorrow. If, actually, we’ve got a slowdown which is more fundamental, then it’s much more difficult to see a recovery in those areas.

Emma Wall: I think it’s fair to say that all eyes are on the Czech Republic, Denmark and Austria, those countries that are beginning to lift restrictions, to see both how the virus responds, how their economy responds and, indeed, their stock markets respond to the lifting of some of those restrictions. And it’s all fingers crossed that they then pave the way and show us other developed countries and developing countries the path we can follow in order to navigate back to normality.

Nick Hyett: Absolutely. I think if we see successful easings of lockdown of the restrictions elsewhere in Europe, that will do wonders for confidence in both the economy and the stock market.

Emma Wall: Nick, thank you very much.

This video is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments and their income can fall as well as rise in value and you could get back less than you invest. Past performance is not a guide to the future.

Any comment on individual companies is not a recommendation to invest.

Views correct as at 16 April 2020.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek
advice. If you choose to invest the value of your investment will rise and fall, so you could get back
less than you put in.

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Equity Research Team

23 Apr 2020 | 8 min read

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